Resources

Are you protected to manage contractor insolvency?

February 2018 - Issue 102

Following the recent collapse of the outsourcing giant Carillion, a quick evaluation of our preparedness in the event of contractor insolvency seems timely for all of us. Here we provide a brief and non-exhaustive checklist of some of the key contract provisions you might seek to turn to in an insolvency scenario.

Payment provisions

Express termination provisions

Third party security

Payment provisions

The building contract should contain express provisions that no further payment to the insolvent contractor is required to be made until completion of the works, and for the project to be completed by an alternative contractor, but providing for the additional costs of doing so to be claimed from the insolvent contractor.

Express termination provisions

For additional flexibility, express provisions can be inserted into the contract to permit the employer to terminate the contractor’s employment in the event of the contractor’s (actual/anticipated) insolvency. From an employer’s perspective, it is advisable to define the term “insolvency” as widely as possible, taking into consideration the variations available under English and Welsh law, and all other jurisdictions that may be appropriate.

Third party security

The contractor can be required to obtain security from third parties in order to further protect the employer from the possibility of contractor insolvency. The contract provisions could provide for third party security to be obtained in general, or for a specific form of security. If these provisions are inserted into the contract, the employer should also specify sanctions in the event that the contractor does not comply with the contract’s requirements for obtaining security.

What about the possibility of engaging with sub-contractors directly to complete the project?

In the event of a contractor going insolvent, it may seem a feasible solution to engage with subcontractors directly remain working on a project until completion. However, the case of Tate Building Services Ltd (Tate) v B & M McHugh Limited (B & M) [2014] highlights the dangers of paying sub-contractors directly when the contractor has become insolvent.

In Tate v B & M, the contract concerned the refurbishment of the toilets at Liverpool Street railway station. The dispute concerned the following parties:

As a result of Tate’s financial difficulties, B&M reconsidered its relationship with Tate and subsequently amended Tate’s sub-contract, to no longer include scope for the cubicles and directly engaged Washroom Limited to carry out the works required on the cubicles. Washroom Limited was paid directly for this work and Tate was purportedly in agreement with this amendment to the contract. However, Tate later contended that it did not agree to the change in scope of works. Tate referred the dispute to adjudication for the full sum it considered due from B&M, which included the cubicle works done by Washroom (and already paid for by B&M).

The adjudicator awarded the full sum that Tate sought and the case therefore highlights the risks of duplicating payments for works where you engage in relations and make payment directly to the sub-contractor. Although B&M issued proceedings to deal with the dispute in court and partially stayed the enforcement and reduced the award payable to Tate, the court confirmed that the adjudicator’s award was valid. It can be assumed that the payment owed to Tate was still more than it would have expected to pay Tate and they would not have expected to make a duplicate payment for the same cubicle works.

If you have any queries regarding sub-contractor contracts, do not hesitate to contact Rebecca Palmer on rpalmer@prettys.co.uk or 01473 298274.